TheChek News Flow

Two deals show that when conditions are right, investors can still win ample payouts

Biotechnology companies do two things, in an ideal world: make drugs that improve patient’s lives, and sell themselves — in whole or in part — to Big Pharma. This second element has been difficult to execute of late, because of high interest rates and uncertainty over the direction of US healthcare policy. Two chunky deals inked on Monday show that, when conditions are right, biotech investors can still win ample payouts. 

Sanofi, the French pharmaceuticals giant, said it had agreed to buy Blueprint Medicines, which makes the world’s only approved treatment for a rare immunological disorder, for $9.1bn in cash, which increases to $9.5bn if some milestones are met. Bristol-Myers-Squibb, meanwhile, will pay BioNTech $3.5bn for 50 per cent of an immunotherapy cancer drug currently in trials, rising to $11.1bn if conditions are met.

While the two deals involve drugs at different stages, and tackling different conditions, they both bring generous terms to the sellers. Blueprint’s investors get a 27 per cent premium to Friday’s share price, which had already run up 15 per cent this year. BioNTech, meanwhile, is getting a valuation potentially as high as $22bn for an asset it acquired for less than $1bn in November 2024. Its stock rose almost 20 per cent on Monday morning. 

Both of the drugs are in hot therapeutic areas, which might explain how these deals got done in a tough market. That’s particularly true for BioNTech’s compound. Helping the immune system to better target cancer has been an extraordinarily successful strategy. The granddaddy of such drugs, Merck’s Keytruda, had nearly $30bn of sales last year and faces the expiry of key patents in 2028.

Now a new generation of drugs — of which BioNTech’s is one — looks to combine immune-oncology with other mechanisms, such as cutting off blood supply to cancer. Pfizer only last week struck a licensing agreement in this space with Chinese biotech 3SBio, for an upfront payment of $1.25bn, plus a contingent payment of a further $4.8bn. BioNTech’s drug, the companies hope, will be approved to treat multiple types of tumour.

Large drugmakers, for their part, need to bolster their growth prospects. BMS has large patents edging towards their expiry date. And while Sanofi may not have quite the same incentive to buy rivals, disappointing results for one of its homegrown drugs on Friday highlight the wisdom of diversifying bets.

Biotech remains challenged. The S&P 500’s biotech sub-index is down more than 10 per cent this year, while the broader index is flat. But investors still have a chance of picking winners. When a company with an exciting drug meets one with a hole in its pipeline, there are few impediments to the healthy circulation of money.

Deal to allow investors to buy into group following March takeover of X

Elon Musk’s xAI is launching a $300mn share sale that values the group at $113bn, as the world’s richest man returns to his business empire and the race to develop artificial intelligence.

The deal will allow staff to sell shares to new investors, according to people close to the situation, validating the pricetag struck when Musk’s xAI start-up acquired his social media service X in March.

The secondary stock offering, known as a tender offer, is expected to be followed by a larger investment round in which the company will offer new equity to outside investors, one of the people said.

The March takeover valued the overall group at $113bn: pricing xAI at $80bn with X at $33bn. Musk bought X, formerly Twitter, for $44bn in October 2022.

xAI declined to comment.

The new share sale comes after Musk, who helped bankroll Donald Trump’s presidential campaign, stepped back last week from his role heading the administration’s cost-cutting initiative. His time at the so-called Department of Government Efficiency (Doge) came to an end after he clashed with cabinet secretaries and criticised central parts of the Trump administration’s policy agenda.

The Tesla and SpaceX chief said he is refocusing on his business holdings after his companies suffered what he called “blowback” over his ties to the president.

“Back to spending 24/7 at work and sleeping in conference/server/factory rooms,” Musk wrote on X late last month. “I must be super focused on X/xAI and Tesla . . . as we have critical technologies rolling out.”

Musk has said the combined group will allow his two companies to benefit from combining models, computing power, distribution and talent. For instance, AI developers can better train their models on the social media group’s data and tap its audience.

However, he did not disclose further specifics on how the March deal was structured. The opaque transaction allowed X, which had alienated some advertisers after adopting Musk’s hands-off approach to content moderation, to leverage the rising value of xAI.

The AI start-up obtained a $45bn valuation in a $5bn private funding round late last year. Musk last year granted investors that backed his Twitter acquisition 25 per cent of the shares in xAI.

Musk launched xAI in 2023 to take on Sam Altman’s OpenAI and other Big Tech rivals. It quickly unveiled the Grok chatbot and built a supercomputer cluster dubbed Colossus, one of the biggest AI data centre projects in the US.

As well as competing with Big Tech and the sometimes rough-and-ready image of Grok, Musk has also agreed partnerships. Last month, Microsoft announced it was making xAI models available to its cloud computing customers, while messaging app Telegram agreed to distribute Grok to its 1bn users.

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Elad Gil started betting on AI before most of the world took notice. By the time investors began grasping the implications of ChatGPT, Gil had already written seed checks to startups like Perplexity, Character.AI, and Harvey. Now, as the early winners of the AI wave become clearer, the renowned “solo” VC is increasingly focused on a fresh opportunity: using AI to reinvent traditional businesses and scale them through roll-ups.

The idea is to identify opportunities to buy mature, people-intensive outfits like law firms and other professional services firms, help them scale through AI, then use the improved margins to acquire other such enterprises and repeat the process. He has been at it for three years.

“It just seems so obvious,” said Gil over a Zoom call earlier this week. “This type of generative AI is very good at understanding language, manipulating language, manipulating text, producing text. And that’s audio, that’s video, that includes coding, sales outreach, and different back-office processes.”

If you can “effectively transform some of those repetitive tasks into software,” he said, “you can increase the margins dramatically and create very different types of businesses.” The math is particularly compelling if one owns the business outright, he added.

“If you own the asset, you can [transform it] much more rapidly than if you’re just selling software as a vendor,” Gil said. “And because you take the gross margin of a company from, say, 10% to 40%, that’s a huge lift. Suddenly you can buy other companies at a higher price than anyone else because you have that increased cash flow per business; you have enormous leverage on the business on a relative basis, so you can do roll-ups in ways that others can’t.”

So far, Gil has backed two companies pursuing this strategy. According to The Information, one is a one-year-old company called Enam Co., focused on worker productivity, which has been valued at more than $300 million by its backers, including Andreessen Horowitz and OpenAI’s Startup Fund.

Though Gil says he can’t discuss specifics of the private deals, he suggests the approach represents something new. “There used to be these technology-enabled roll-ups 10 years ago, and most of them kind of ended up being not really that much of a user of technology,” he says. “It was kind of like a thin veneer painted on to increase the valuation of the company. I think in the case of AI, you can actually radically change the cost structure of these things.”

Whether the plan proves as lucrative as some of his other bets remains to be seen. Gil has famously backed a host of big brands that have produced riches for their backers, including Airbnb and Coinbase, both of which are now publicly traded, and privately held Stripe, whose valuation has bounced around but reportedly settled in the range of $91.5 billion earlier this year, when its earlier backers bought up more of its shares.

Part of the challenge with roll-ups is finding the right team composition — ideally including a strong technologist along with someone who is “very strong in PE” — and “those things don’t go hand-in-hand,” Gil noted. He said he’s met “maybe two dozen of these teams” so far and mostly looked past them, not because they “weren’t amazing” but because “they still need to sort some things out.”

Gil, who has deep relationships with firms across Silicon Valley, may also find himself competing with these frequent collaborators, as a growing number of them, like Khosla Ventures, consider whether to pursue AI roll-ups themselves.

One senses that, either way, Gil is not in it for the money at this point if he ever was. He says his ability to spot trends earlier than most comes instead from the heart. “I love technology, and I love progress, and I love just engaging — both with people who are working on important, interesting things, but also the technology itself.”

When GPT-3 launched, for example, Gil was already experimenting with its predecessor, he said. “When GPT-3 came out, it was such a big leap from GPT-2 that you could just extrapolate out the technology curve. You’re like, ‘Oh my gosh, if this keeps going and scaling’ — all the scaling laws were kind of evident — ‘then this is going to be transformative.’”

That hands-on approach continues today with the small team Gil has assembled, including “people with very deep engineering backgrounds” who “periodically play around with all the AI front-end companies. One person on my team just writes a bunch of scripts and we run them, and we look at performance, and we look at tooling, and it’s super hands-on.”

It’s because of that constant tinkering that, after years of uncertainty in the AI market, Gil sees clear winners emerging. “I used to say, even six months ago, that the more I know about AI, the less I know, because the markets were so dynamic; the technologies were so dynamic,” he said. “And I feel like in the last couple months — maybe the last two quarters — a subset of markets have really crystallized.”

In legal, “we kind of know who the one or two main winners are probably going to be. That’s true in health care. That’s true in customer success and support,” said Gil, who clearly thinks these include his own portfolio companies, which he cited in our conversation.

Among these bets is Harvey, which develops large language models for law firms and in-house legal teams and is reportedly in talks to raise new funding at a $5 billion valuation; Abridge, a healthcare AI company that aims to improve doctors’ clinical documentation workflows (and whose $250 million Series D round was co-led by Gil back in February); and Sierra AI, co-founded by famed operator Bret Taylor, which helps companies implement AI agents for customer service. (The company was valued in the billions of dollars right out of the gate.)

Still, Gil is careful not to declare the game over. “I don’t mean to paint the picture that the game is over or that things are done. I think it’s more that there were two dozen companies that all seemed kind of interesting, and maybe now there’s three or four of them [per vertical]. The map of the likely winners is solidified.”

In the meantime, it’s clear in conversation that this moment represents more than just another investment cycle to him. “I just think it’s a really fun period of time, because so much change is happening, and so there’s just a ton to do,” he said.

Being at the intersection of two transformations — not just betting on the future of AI but on the future of how AI will reshape everything else — is quite simply “exciting,” he added.